What determines your mortgage interest rate?

Blog posted On August 09, 2018

If you’re shopping for a home, you’re probably paying attention to what interest rates are doing.  There are numerous resources available to check average mortgage rates in your area.  Researching rates can give you an idea of what to expect, but the mortgage rate for your specific mortgage loan depends on several key factors. 

Review what determines your mortgage interest rate before you meet with your lender, so you have a realistic idea of what to expect. 


Credit Score

The better your credit score, the lower your mortgage rate.  Building credit and maintaining a positive credit score is one way to show lenders you are capable of repaying your mortgage loan.  Now, a perfect credit score won’t necessarily mean you’ll get a rock-bottom interest rate, but a little credit repair goes a long way.  Most financial experts suggest starting credit repair at least six months to one year before buying a home.  

Home Location

Mortgage rates will also vary from region to region.  State and local regulations influence interest rates.  The mortgage rate also depends on the financial stability of the local market.  In an area where homes are foreclosed frequently, or homeowners are consistently making late payments, home buyers will likely face higher mortgage rates.  

Home Price, Loan Amount, and Down Payment

Generally, a larger down payment means a lower mortgage rate.  Down payment requirements vary based on the type of mortgage loan.  Usually, when the home buyer puts down less than 20% on a conventional loan, they will be required to pay private mortgage insurance.  Because the home buyer is paying mortgage insurance that protects the lender, the interest rate may actually be lower than if the home buyer put down 20% and does not pay mortgage insurance.  Once you’ve gotten prequalified for your mortgage loan and find out what your budget is, you can review with your mortgage lender how much you should put down. 

Loan Term

Your loan term refers to the length of the mortgage loan.  Mortgage loans are usually available with 5-year, 7-year, 15-year, or 30-year terms.  Shorter loans will typically have lower mortgage rates, but larger monthly payments.   

Fixed or Adjustable

A fixed-rate loan will maintain the mortgage rate throughout the life of the loan and an adjustable-rate loan will have a fixed introductory rate for a set period of time, before fluctuating based on market conditions.  Most adjustable-rate mortgages will have a cap that they can’t exceed.

Type of Loan

Mortgage rates vary depending on whether the loan is conventional or government-sponsored as well.  Conventional mortgages usually have higher mortgage rates, because they are not insured.  FHA, USDA, and VA loans typically have a lower mortgage rate because they are insured or sponsored by their respective government agencies.


Monitoring mortgage rate changes can give you a general idea of what to expect when you are shopping for a home.  The mortgage rate you actually get depends on all of the factors above and varies from situation to situation.  Before you start shopping for a home, meet with a mortgage loan officer to review your options.  Your loan officer will be able to compare scenarios for you and find the best mortgage loan for your immediate and long-term goals.